Remittances must go digital

Covid-19 lockdowns helped digital money movement options flourish

Remittances proved surprisingly resilient during the pandemic and inflows for 2021 were very strong, reaching $773bn globally and $605bn for low- and middle-income countries. In addition to being a critical lifeline for families, remittances play an important role in the economies of many countries. In 2021, 30 countries received over 10% of their gross domestic product from remittances.

Border closures and business lockdowns in the early days of Covid-19 helped digital money movement options flourish. These offer a variety of advantages for senders and receivers, including cost, security and speed. However, only a third of remittances are initiated digitally and only one-third of those are picked up digitally. Focus needs to be on how to enable more of these digital transfers.

Costs are still high for the average remittance, but are much lower for digital remittances and in cases where people can compare multiple options.

As of the second quarter of 2022, World Bank remittance price data show that:

  • The average $200 remittance costs 6% — this is the headline number policy-makers most often mention.
  • The digital remittances index (for remittances digitally initiated in an online or self-assisted way) is 4.8%.
  • The Smart Remitter Target (SmaRT) index (a measure of what a savvy consumer with access to sufficiently complete information could pay) is 3.4% — almost at the 3% UN sustainable development goal target.

These observations are confirmed by Visa Economic Empowerment Institute modelling of card-initiated digital remittances over the last two years. In the modelling, VEEI determined costs across several money transfer operators for 25 key global corridors and compiled three measures: the average cost, lowest cost and highest cost.

  • The average costs for a $200 remittance across all MTOs and corridors declined to 3.9% from 4.2% in 2022.
  • The average of the lowest costs declined to 2.1% in 2022 from 3%, a decline of almost 30% — this measure is roughly analogous to the World Bank’s SmaRT index.
  • By contrast, the average of the highest costs went up to 7.1% from 6.2%, driven largely by two corridors, where MTOs were offered dramatically different pricing. Migrant workers without the ability to check multiple options could have paid exceptionally high prices (and some undoubtedly did) during this period.

Overall, while the average price of a remittance in the research was 3.9%, VEEI was able to find costs below 3% in 20 of the 25 corridors in 2022.

Clearly, the ability to send remittances digitally and to easily compare transfer options make a big difference to senders and their families. So, what needs to happen?

Traditional remittances must become digital. Cash-initiated remittances are the most expensive way to send a remittance and it is perhaps worse on the receiving end — many MTOs maintain vast cash out networks in receiving countries and this adds appreciable costs to remittances today.

Migrant workers must be able to compare options and send remittances digitally. Their families must be able to then spend the funds digitally at businesses in their communities. None of this can happen without basic digital infrastructure.

Innovation must be facilitated by more consistently applied compliance rules and consumer choice needs to be promoted by making it easier for remittance providers to bring new innovations to market.

Five steps will help unlock the benefits of innovation and digitalisation for more people while also uplifting businesses and communities.

First, begin with digital enabling infrastructure if it does not already exist. The digital receipt and use of remittances will be a non-starter without basic enabling infrastructure. For millions of people, basic infrastructure like electricity will be a barrier to the digitalisation of remittances, payments and commerce. Beyond electricity, internet connectivity — and broadband connectivity — will be crucial.

Second, focus on digital enablement broadly, keeping both consumers and businesses in mind. While the digital receipt of remittances is critical for further progress on efficiency, the larger goal is to digitally enable everyone, everywhere to fully participate in this new world. Individuals need to be able to receive remittance funds and use them digitally, with ubiquity. This requires digitally enabling businesses, especially small businesses, helping them to accept digital payments and to connect them to digital marketplaces. Therefore, consumers and businesses must both be part of the equation in achieving digital ubiquity. Countries that have driven digital ubiquity most successfully over the last decade have worked to drive adoption on both sides.

Third, aim for an open, interoperable digital ecosystem built on a foundation of resilience and security. Interoperability should be favoured over uniformity — more paths are better than one. A truly interoperable service should be able to reach as many endpoints as possible: traditional bank accounts, prepaid accounts and digital wallets.

Fourth, streamline the compliance environment to reduce cross-border frictions. While the private sector is innovating, competing and improving speed and efficiency, policy-makers have a key role to play. Remittances go through a number of regulatory regimes that currently add frictions. But these can be reduced by streamlining and aligning compliance rules as much as possible.

Finally, simplify the licensing process to allow remittance innovation and competition to thrive. Policy-makers can also help the private sector introduce innovations more quickly and with less burden. Consistent licensing requirements would help remittance service providers enter and operate across multiple geographies with less friction. Streamlining licensing requirements and processes will help new market entrants bring the benefits of digital remittances to more corridors, and therefore to more people.

Chad Harper is Senior Fellow at the Visa Economic Empowerment Institute.

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